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Calculation of damages following an anticipatory breach

This case was first brought to the attention of the Commercial Court in June 2013, when an appeal on the ruling of the first arbitral panel was sought by the Claimant, Bunge SA (“Bunge”). The matter at hand was the effect of the Default Clause in GAFTA 49.

The Default Clause 20 stipulates the following:

The party other than the defaulter shall…have the right, after serving notice on the defaulter…to sell or purchase…and such sale or purchase shall establish the default price.

If either party be dissatisfied with such default price…then the assessment of damages shall be settled by arbitration.

Damages payable shall be based on the difference between the contract price and…the default price.

Damages shall include any proven additional expenses which would directly and naturally result in the ordinary course of events from the defaulter’s breach of contract.

Damages…shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity.

Background

On 5 August 2010 the Defendant, Nidera BV (“Nidera”), agreed to buy 25,000 tonnes of Russian wheat crop from Bunge, under a FOB contract. After the contract was concluded, Russia introduced a legislative embargo on exports of wheat from its territory, covering the entire intended shipping period running from the 23 to the 30 August 2010.

Bunge renounced the contract considering it automatically void according to the GAFTA Prohibition Clause. Nidera disputed this, arguing that Bunge were in repudiatory breach. Nidera exposed themselves to accusations of failing to mitigate after rejecting Bunge’s offer to reinstate the contract the following day. Instead of agreeing, Nidera began arbitration proceedings under the GAFTA rules, in support of a claim for damages in excess of three million US dollars.

GAFTA’s first tier arbitration tribunal held that Bunge had repudiated the contract because their notice of cancellation was premature; the embargo might have been lifted in time to continue with the shipment. Nonetheless, the tribunal declined to award Nidera a substantial award because the embargo was not lifted and therefore meant the contract would have been cancelled in any event when the time came for delivery.

However, after both parties appealed, the GAFTA Appeal Board awarded the damages to Nidera of over three million US dollars for the difference between the contract and the market price on the date that the repudiation was accepted. Bunge appealed this measure of damages to both the High Court and Court of Appeal but lost both times. Bunge proceeded to the Supreme Court.

The Supreme Court ruling and its significance

The Supreme Court unanimously allowed the Bunge’s appeal in April 2015. They held that the GAFTA Default Clause might produce a different outcome than that at common law. Therefore, there was no scope for a presumption that the parties intended the clause to produce the same measure of damages as the compensatory principle.

In giving the lead judgment, Lord Sumption stated that the fundamental principle of the common law of damages is the compensatory principle. In calculating the damages it must first be established what the difference is between the contract price and the market price of the goods at the time they ought to have been delivered. Secondly, any other relevant contingencies must be considered if they would have reduced the value of performance.

Lord Sumption reasoned that the GAFTA Default Clause provides a complete code for determining the market value of the goods. However, it does not deal with the effect of subsequent events which would have resulted in the original contract not being performed in any event, to which the common law still applies. Consequently following the common law principle, Nidera in fact lost nothing and it was held they should therefore receive only nominal damages in the sum of five US dollars.

The Supreme Court alluded to The Golden Victory [2007] case several times in its obiter comments. In this case it was held that the court can have regard to events occurring after breach when assessing damages for breach of contract. All five Law Lords accepted that, as a general rule, damages for breach of contract or tort are assessed based on what is known at the date of the breach or tort, but that the court could depart from this rule where it judged it necessary to do so to compensate the innocent party properly, further reflecting the court’s efforts to uphold the common law compensatory principle.

How is market price determined?

This case confirms that where there is an available market for the goods, the market price is determined at the contractual date of delivery, unless the buyer should have mitigated by going to the market and entering a substitute contract at some earlier stage. Normally, however, the injured party will be required to mitigate his loss by going into the market for a substitute contract as soon as is reasonable after the original contract was terminated.

The result is that in practice where there is a renunciation and an available market, the relevant market price for the purpose of assessing damages will generally be determined not by the prima facie measure but by the principles of mitigation.

Practical Implications

This case is a significant decision on the assessment of damages in respect of anticipatory breach of contract for the sale of goods. Inevitably, each case will vary depending on the facts but Bunge SA v Nidera BV does confirm:

That when calculating damages it must first be established what the difference is between the contract price and the market price of the goods at the time they ought to have been delivered. Any other relevant contingencies will be considered if they would have reduced the value of performance, applying The Golden Victory.

The common law principle that repudiating parties are able to argue that the court should reduce damages of the innocent party if it would not have been able to perform its obligations had the contract continued.

That an express contractual provision will only be the starting point for an assessment of damages unless its drafting is sufficiently clear to preclude the application of The Golden Victory.

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